The Cabinet Office has now published its final guidance requiring bidders for government contracts to self-certify whether they have had any ‘occasions of non-compliance’ in the past. The amendments made are helpful in a number of areas, being principally a significant reduction in the retrospective application of the rules; the removal of targeted anti-avoidance rules (TAARs) from the scope; and more clarity on the entities affected. Nevertheless, the new rules still present a challenge to businesses in managing bids. Prospective bidders may also feel the need to change their approach to tax planning.
The government announced in autumn last year that, in effect, it wanted to use its purchasing power to stop tax avoidance by its major contractors. As a result, and as trailed in previous articles in this journal (see ‘Tax and public procurement’), from 1 April 2013, bidders for government contracts will need to certify that they are tax compliant. Failure to satisfy the new measure will bar the bidder from winning the contract.
The original proposals were put out to consultation on 14 February, with draft guidance in the form of a Procurement Policy Information Note. On Budget day, 20 March, HMRC published its reply to the consultation responses and the final Procurement Policy Note was issued by the Cabinet Office on 28 March 2013.
HMRC’s response helpfully clarifies aspects of the guidance and curbs some of the more burdensome aspects of the original proposals, which went further than the stated policy aim. Various aspects of the new regime are still not in place and HMRC has indicated it will review aspects in the next year, but we are now a lot clearer about the regime that has, after all, already started.
For central government tenders advertised in the Official Journal of the European Union on or after 1 April 2013, buying authorities will include a new ‘pass/fail’ question in the pre-qualification questionnaire (PQQ), requiring bidders to self-certify whether they have had any ‘occasions of non-compliance’ in the past. PQQs normally have to be submitted within 30 days of the date of the OJEU advert.
If a bidder has had an occasion of non-compliance, then if they want to still bid for the contract they will need to provide an ‘explanatory statement’ setting out any mitigating factors. The buyer will then review the statement to determine whether to pass or fail the bidder.
An ‘occasion of non-compliance’ arises where the bidder has accepted, or a court has determined, that additional tax is payable and so has amended a tax return because:
The Budget announcement has narrowed the scope of avoidance caught by the new rules by excluding targeted anti-avoidance rules, following complaints made in the consultation responses that they were widespread and undefined. This is a welcome change, although HMRC has indicated that when it reviews this test in the next year, the inclusion of TAARs, or at least of some of them, is a possibility. Other aspects of this definition may cause issues in the future. For example, there is no minimum value to planning caught, so even small scale SDLT, NIC or VAT planning may, in principle, cause a problem.
If a bidder has had an occasion of non-compliance, it will need to provide an ‘explanatory statement’ setting out any mitigating factors – for example, that there has been a break from past behaviour and the bidder no longer engages in tax planning which might be affected by anti-avoidance measures.
These statements will be crucial to bidders and they will need to be drafted very carefully. Crucially, they will be reviewed by the procurement teams at the buyer and not by HMRC. As these teams will not be tax specialists, the concern arises as to how the statements will be reviewed. It is a racing certainty that there will be disaffected bidders, disqualified from a bid process because of tax planning, who will be looking at the process very carefully.
Additional guidance for buyers is to follow – presumably an update to that circulated at the time of the consultation. Procurement teams have now been promised a point of contact at HMRC to offer support. In addition, under the original draft guidance for buyers, where the buyer believes the notified behaviour constitutes serious non-compliance, then it must seek legal advice before either proceeding with or excluding the bidder. However, decisions will be controversial.
There is now more clarity about the bidders caught by the new guidance. The new guidance will follow general procurement law and apply the ‘economic operator’ test from the Public Contracts Regulations, SI 2006/5. The application of this test can, in practice, vary depending on the buying authority, but will generally mean the bidding entity itself, together with any other group company substantially involved in the bid, for example, one which is providing finance or technical assistance.
As is currently the case with other procurement conditions, using a new company will not normally circumvent the rules.
Subcontractors performing a ‘significant part’ of a project will also need to certify separately. Usefully, it has been clarified that main contractors will not have to certify on behalf of subcontractors. Joint venture bidders will also need to certify separately but partners and LLP members will not need to do so, the economic operator being the partnership or LLP itself.
The government needed to create a level playing field to ensure non-UK bidders not exposed to UK tax rules did not get an advantage. Accordingly, whilst the definition of economic operator means UK bidders will not normally need to certify for non-UK group companies, where a bidder is itself subject to any non-UK tax regimes then it will need to certify whether it has fallen foul of ‘equivalent’ anti-avoidance measures in other countries. This aspect of the new guidance remains unsatisfactory and it appears that UK bidders will be at a competitive disadvantage as against a bidder based in a country with a less developed tax regime.
The new guidance only applies to contracts advertised by central government departments, executive agencies and non-departmental public bodies. This is a surprisingly wide category – for example, it catches bodies as diverse as the Low Pay Commission and the UK Atomic Energy Authority.
Other public bodies, such as local authorities and universities, have a discretion as to whether to apply the guidance. They are being encouraged to look at the practicality of doing so, but the expectation must be that many of them will do so, if only because the prospect of being the body that allowed a ‘tax avoider’ to win a contract is not appealing. In any event, cynicism aside, under a change announced in the recent response, the guidance will only apply to contracts expected to be worth more than £5m. This should take many smaller bidders and smaller buying authorities out of the new rules.
As at the time of writing, the Scottish government has yet to decide whether to implement the guidance, but it is expected that it will do so.
Under the original proposals, bidders would have had to certify for the last ten years, which was which many felt would have been unworkable. HMRC has listened, so now the general rule is that bidders must certify for six years.
More importantly, the rules will now only apply to amendments to tax returns made on or after 1 April 2013 and in respect of tax returns originally filed on or after 1 October 2012. In effect, some two years of tax activity may still covered where the tax return is amended after 1 April 2013. Bidders are not therefore entirely excused from checking the past when the rules come in.
For contracts won under the new regime, the buying authority will require a clause to be included which will allow it to take action, including termination of the contract, if there is a subsequent occasion of non-compliance during the life of the contract. The standard wording for the clause has not yet been published, but clearly this will lead to a much greater need for bid teams to be fully aware of any potential tax litigation or settlements with HMRC.
Bidders are likely also to be at risk where a subcontractor or JV partner has an occasion of non compliance. Bidders might consider ensuring that their own contracts with such third parties will give adequate protection against non-compliance by them.
The new procurement regime is now a lot clearer, even if we do not yet have the final guidance for buyers, the draft contract wording or an understanding as to whether all public bodies will apply the guidance.
Procuring authorities will need to establish very quickly how they are going to manage these new rules and, in particular, how to review bids which contain detailed, and no doubt technical, tax statements. There will be disaffected bidders, disqualified because of tax planning, who will be looking at the process very carefully.
Bid, tax and legal teams in bidders will need to identify how to factor these new rules into group policy. They will need to ensure that relevant, accurate and up to date information is readily available within the tight timescale of PQQ response times. Any future tax planning or settlements for relevant periods will also need to take into account the potential impact on bid opportunities.
The new commencement rules have made it strictly unnecessary to ‘clear the decks’ of planning relating to tax returns before October 2012. However, issues for earlier periods could cause embarrassment if there is a major tax settlement or litigation after a contract has been awarded. For those bidders wanting to maximise their relationships with government buyers, there is still a case for clearing the decks.
